Working Capital Management

Ch 22 P18 Build a Model 7/5/03Chapter 22. Solution to Ch 22 P18 Build a ModelInput DataCollections during month of sale10%Collections during month after sale75%Collections during second month after sale15%Lease payments$9,000Target cash balance$90,000General and administrative salaries$27,000Depreciation charges$36,000Income tax payments (Sep & Dec)$63,000Miscellaneous expenses$2,700New design studio payment$180,000Cash on hand July 1$132,000Minimum cash balance$90,000Sales, labor, and RM adjustment factor0%MayJuneJulyAugustSeptemberOctoberNovemberDecemberJanuaryOriginal sales estimates$180,000$180,000$360,000$540,000$720,000$360,000$360,000$90,000$180,000Original labor and raw mat. estimates$90,000$90,000$126,000$882,000$306,000$234,000$162,000$90,000Collections and purchases worksheetSales (gross)$180,000$180,000$360,000$540,000$720,000$360,000$360,000$90,000$180,000CollectionsDuring month of sale36000540007200036000360009000During 1st month after sale135000270000405000540000270000270000During 2nd month after sale2700027000540008100010800054000Total collections$198,000$351,000$531,000$657,000$414,000$333,000PurchasesLabor and raw materials$90,000$90,000$126,000$882,000$306,000$234,000$162,000$90,000Payments for labor and raw materials$90,000$126,000$882,000$306,000$234,000$162,000Cash gain or loss for monthCollections$198,000$351,000$531,000$657,000$414,000$333,000Payments for labor and raw materials90,000126,000882,000306,000234,000162,000General and administrative salaries27,00027,00027,00027,00027,00027,000Lease payments9,0009,0009,0009,0009,0009,000Miscellaneous expenses2,7002,7002,7002,7002,7002,700Income tax payments63,00063,000Design studio payment180,000Total payments$128,700$164,700$983,700$524,700$272,700$263,700Net cash gain (loss) during month$69,300$186,300$452,700$132,300$141,300$69,300Loan requirement or cash surplusCash at start of month$132,000$201,300$387,600$65,100$67,200$208,500Cumulative cash$201,300$387,600$651,000$67,200$208,500$277,800Target cash balance$90,000$90,000$90,000$90,000$90,000$90,000Cumulative surplus cash or loansoutstanding to maintain $90,000 target cash balance$111,300$297,600$155,100$22,800$118,500$187,800Max. Loan$155,100b. How much must Bowers borrow each month to maintain the target cash balance?Answer. Just look at the "Cumulative surplus" line at the bottom of the cash budget.c. Would the cash budget be accurate if inflows came in all during the month but outflows were bunchedearly in the month?No it would not be accurate. A daily cash budget would be necessary because not all payments would be noted.d. If the company produces on a seasonal basis. How would this affect the current ratio and the debt ratio?Before the major seasonal movement, the company will not have many assets and little debt. As it begins to make more, it will begin to borrow more in order to finance.e. If its customers began to pay late, this would slow down collections and thus increase the required loan amount. Also, if sales dropped off, this would have an effect on the required loan. Do a sensitivity analysis that shows the effects of these two factors on the max loan requirement. Assume the purchases of labor and raw material also vary by the sales adjustment factor.Answer:The "Sales adjustment factor" can be used to cause sales to vary from the base levels. Similarly, wecan change the percentage of late paying customers. Here is the relevant data table:ChangeMaximum Loan Requiredin Sales% Collections in 2nd month$155,1000%15%30%45%60%75%90%-100%$ 496,200$ 496,200$ 496,200$ 496,200$ 496,200$ 496,200$ 496,200-75%$ 318,450$ 325,200$ 331,950$ 338,700$ 345,450$ 353,550$ 473,800-50%$ 148,800$ 189,300$ 229,800$ 270,300$ 310,800$ 351,300$ 391,800-25%$ 110,100$ 150,600$ 191,100$ 231,600$ 288,300$ 349,050$ 409,8000%$ 101,100$ 155,100$ 209,100$ 263,100$ 317,100$ 371,100$ 427,80025%$ 92,100$ 159,600$ 227,100$ 2,946,000$ 362,100$ 429,600$ 497,10050%$ 83,100$ 164,100$ 245,100$ 326,100$ 407,100$ 488,100$ 569,10075%$ 741,000$ 168,600$ 263,100$ 357,600$ 452,100$ 546,600$ 641,100100%$ 65,100$ 173,100$ 281,000$ 389,100$ 497,100$ 605,100$ 713,100

If there is no borrowing.This is a formula: do not change.Assumed constant: Do not change.For problem e: Allow this to change to reflect slower collections.Use Excels MIN function for row 54 with a minus sign in front.Put the max loan for the base case hear.Original sales estimate times 1 plus the sales adjustment factor.Original labor and RM estimates times 1 plus the sales adjustment factor.Payments this month are for last months Labor and raw materials.Note: When the percent collected during the second month after sale is changed, the percent for collections during month after sale is automatically changed so that 100% of sales are collected during the three-month period.